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Rare earth mining, textiles and ICT manufacturing seen as areas Vietnam can benefit from trade war

Workers on a garment assembly line of Maxport Garment Company in Hanoi, Vietnam.

PHOTO: REUTERS/Kham

AUGUST 27, 2019 - 1:45 PM

Even as the US-China trade war intensifies, analysts at Fitch Solutions Macro Research said that the rare earth mining, textiles manufacturing and information and communications technology (ICT) manufacturing sectors of the Vietnamese economy will benefit from the changes brought on by the US-China trade war, namely the supply chain shift out of China.

Rare earth minerals are a group of 17 elements that are used in a number of highly strategic or technologically advanced products such as semiconductors, fibre-optic telecommunications, batteries and high performance magnets .

China currently holds a near-monopoly on the global supply of rare earth metals, with over 72 per cent of global market share.

Additionally, reports have emerged suggesting Beijing could consider imposing restrictions or tariffs as part of the trade war with the US.

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Analysts mentioned that even if China decides not to limit the export of rare earth minerals to put pressure on the US, increased attention and concern by US policymakers over China’s dominant position is likely to support a diversification of rare earths supplies .

US policymakers have already been seen to propose legislation aimed at encouraging the domestic production of rare earths, while the US Department of Defense has asked for additional federal funds to do the same.

While the analysts do not believe that new facilities will be able to ramp up production in the next one-to-two years, they said that the increased focus on the source of rare earth elements will likely see greater investment for those countries with sizeable reserves deposits such Vietnam.

In the area of textiles, Vietnam stands out as the most immediate beneficiary of multinational firms’ efforts to diversify and maintain access to US markets .

In recent years , the country has attracted significant investment into its low-value added manufacturing, with investors finding its combination of low wages , relative political stability, rapidly developing transport and utility infrastructure and improving regulatory environment to be particularly attractive.

Analysts believe that continued US-China tensions will likely spur further investment, not only due to the favourable business environment, but also because they expect manufacturers will prefer to ramp up production in locations that they already have operations, leveraging current networks and existing knowledge. In the case of Vietnam, it is already the second largest exporter of apparel to the US, only behind China, making it an obvious diversification option.

Analysts have already seen this playing out to a certain extent, with firms like Brooks Sports and Asics having announced plans to move part of their shoe manufacturing into Vietnam in recent months . With the US having announced plans to expand tariffs on Chinese goods to cover textiles and other final consumer products, analysts see room for further investment.

The ICT sector has already been significantly impacted by US/China trade war and analysts expect further shifts in supply chain dynamics in the coming quarters .

Even before the trade war, analysts had already begun to see multinational firms shifting low-to-mid level ICT manufacturing out of China as as saturated labour market pushed up costs , but this trend has been accelerated by trade tensions .

ICT exports and investment are likely to remain a major focus for the US government. In part this is due to the sheer size of US ICT imports from China, though efforts to hamper Beijing’s Made in China 2025 development agenda play a role as well.

Analysts have already seen supply chain dynamics beginning to shift, driven primarily by original equipment manufacturers.

In Q1 2018, China accounted for around 56 per cent of total US electronics imports , but by Q1 this year, this has fallen to around 43 per cent. Part of this likely reflects a re-routing of products from China through Southeast Asia rather than a shift in productive capacity and analysts expect China will remain a major player in this market.

However, over the longer term, given the increasing US government focus and risk of restrictions, analysts believe this will spur a continued diversification and a ramping up of new productive capacity across Southeast Asia.

So far, Vietnam appears to be a major beneficiary in low-to-mid range ICT product manufacturing. The country is already a well-established electronics manufacturer and is currently the second largest smartphone exporter in the world, benefitting from U$17 billion in investment from Samsung alone since 2007.

Similarly, with contract manufacturers such as Foxconn and Pegatron contemplating shifting more production out of China and into emerging Southeast Asia, the analysts believe that Vietnam is positioned to benefit from further investment.